Empirical Behavioral Finance

Doron Kliger
Department of Economics, University of Haifa
Mount Carmel, Haifa, 31905, Israel; kliger@econ.haifa.ac.il

Martijn J. van den Assem

Erasmus School of Economics, Erasmus University Rotterdam
and Tinbergen Institute
P.O. Box 1738, 3000 DR, Rotterdam, the Netherlands; vandenassem@ese.eur.nl

Remco C.J. Zwinkels

Erasmus School of Economics, Erasmus University Rotterdam
and Tinbergen Institute
P.O. Box 1738, 3000 DR, Rotterdam, the Netherlands; zwinkels@ese.eur.nl

Journal of Economic Behavior & Organization, November 2014 (107, Part B), 421-427

JEL: A31, G02

Keywords: behavioral finance, special issue, diversification heuristic, 1/n rule

We thank all authors for submitting their work for inclusion in the special issue, and the many
reviewers who provided us and the authors with invaluable support and advice. We are grateful to
William Neilson for giving us the opportunity to organize the special issue, and for his support
throughout the entire process.
1. Introduction

For several decades now, behavioral finance has been integrating insights from the broad social
science perspective into research in financial economics. A large body of literature has evolved since
the pioneering work of, for example, Shiller (1981), De Bondt and Thaler (1985), Shefrin and Statman
(1985), and Roll (1986). In a nutshell, it has brought realism and descriptive power to a field that was
originally built on perfectly rational agents and capital market efficiency. Much of the progress has
been summarized in excellent books and papers. For a comprehensive overview we recommend
Barberis and Thaler (2003), Subrahmanyam (2008), Shefrin (2009), and Baker and Nofsinger (2010).
In addition, there are a number of excellent reviews of behavioral research that specifically focus at
asset pricing (Hirshleifer, 2001; Shefrin, 2008), decisions of individual investors and households
(Campbell, 2006; Barber and Odean, 2013), or corporate finance (Shefrin 2006; Baker and Wurgler,
2013).

In September 2012, the Journal of Economic Behavior & Organization (JEBO) published a call for
papers for a special issue on empirical research in behavioral finance. Along with enriching our
understanding of human financial decision making and market dynamics, the interaction with other
fields of study has also paved the way for the use of alternative data and methods in financial
research. To further stimulate this development, it was stated in the call for papers that preference
would be given to empirical work that uses innovative experiments, field data, qualitative and
quantitative surveys, and other types of data that are not available in standard databases. The call
generated an overwhelming number of 163 submissions. This enormous interest underlines the
significance of the field and the many different research opportunities that it continues to offer.

In what follows, we first briefly introduce the 25 selected contributions published in the special issue.
Next, we report on a questionnaire that we distributed among researchers who submitted a paper or
were asked to review a paper. The questionnaire serves two purposes. First, it gives the current view
of the behavioral finance research community about the relative importance of different types of
research within the theme of empirical behavioral finance. Second, it tests whether behavioral
finance experts display one of the many intriguing choice patterns that are being studied by the
profession.

With respect to the first purpose, the main results are that (i) respondents attach roughly equal
importance to the use of real and constructed data, (ii) there is a strong preference for further
research on individuals over research on groups and organizations, and (iii) research on preferences
receives more weight than research on beliefs, and both preferences and beliefs are deemed more
important than limits to arbitrage. Regarding the second purpose of the questionnaire, we find

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strong evidence for the bias that follows from naïve reliance on the diversification heuristic, or the
more extreme 1/n rule (Read and Loewenstein, 1995; Benartzi and Thaler, 2001).

2. Contributions in this special issue

The first article in the special issue is De Neve and Fowler (2014). The recent progress in DNA analysis
has created fascinating opportunities to examine the links between genetic variations and particular
behaviors. In their unique large-scale study conducted with approximately 12,000 individuals, De
Neve and Fowler find a link between credit card usage and the monoamine oxidase A (MAOA) gene.
Next, Feltovich and Ejebu (2014) experimentally investigate whether people save less when they
observe others’ consumption. They find evidence of undersaving in the treatment that permits inter-
personal comparisons, and conclude that the effect is driven by subjects who are trying to “keep up
with the Joneses”. Gathergood and Weber (2014) use UK survey data to shed light on the co-holding
puzzle, the observation that many people simultaneously hold high-cost consumer debt and low-
yield liquid assets. They conclude that it is lack of self-control and not financial illiteracy that drives
this costly behavior. Collins and Urban (2014) report on a natural experiment that shows how
seemingly irrelevant changes in the decision environment can affect the behavior of firms. They
investigate the effect of a state-level policy that merely changed the status quo for U.S. mortgage
loan servicing organizations from “wait and see” to “taking action”, and find that it changed the
firms’ behavior and led to more loan modification and filings of foreclosures.

The next three papers study individual investor data. Hoffmann and Shefrin (2014) ask how technical
analysis impacts investors’ portfolio selection and performance. On the basis of transaction records
and survey responses of 5,500 retail investors, they find that investors who use technical analysis
make poor portfolio decisions that cost them 50 basis points per month in terms of raw returns.
Gherzi et al. (2014) investigate investors’ portfolio monitoring decisions. In contrast to earlier work
that pointed out that investors’ behavior is reminiscent of the myth of ostriches, because of their
tendency to “stick their heads in the sand” in response to news of negative market movement, they
find that investors increase their portfolio monitoring not just after upswings but also after
downswings. Heimer (2014) sheds further light on the phenomenon of over-trading among individual
investors. Using a U.S. nationwide household survey with data on respondents’ investments and their
social expenditures, he uncovers evidence for a positive relation between social interaction and
active portfolio management.

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Frydman and Rangel (2014) use a laboratory experiment to investigate whether it is possible to
debias investors’ propensity to sell securities with capital gains and hold on to securities with capital
losses. They find that reducing the salience of purchase prices successfully reduces this well-
documented disposition effect among their subjects. Roth and Voskort (2014) examine how
accurately financial advisors can gauge the risk preferences of their advisees. Their artefactual field
experiment with financial professionals and student-subjects points out that advisors do not solely
rely on targets’ self-assessments, but also on stereotyping and their own risk preference. Hytönen et
al. (2014) employ functional magnetic resonance imaging (fMRI) to explore the origins of path
dependence in risky choice. They find that the increased risk appetite after gains and losses is related
to increased activity of affective brain processes and decreased activity of deliberation-related brain
processes. Hochman, Shahar and Ariely (2014) explore how prepayment affects financial decisions in
a riskless context. Among other things, they show that people tend to overvalue prepaid money.
Their experiments inform firms on how they can use prepayment mechanisms to get more out of
their agents and how payment structures can be used to help individuals better manage their
finances. Vogel et al. (2014) study whether task-oriented and relation-oriented dimensions of
diversity in an entrepreneurial team affect funding decisions of external financiers. They conclude
that both dimensions have an impact on the funding decision, implying a trade-off between the
social costs of diversity and access to external funding.

The next set of papers study belief formation using different types of data. Choi and Hui (2014) focus
on in-play soccer betting markets to study whether underreaction and overreaction to news are
related to the degree of surprise. Their results indicate that underreaction decreases with surprise,
and that overreaction occurs when events are extremely surprising. Jacobsen et al. (2014) use a set
of quantitative surveys to study differences in optimism between men and women. They find that
men are more optimistic than women, and show that this difference explains systematic gender
differences in asset allocation. Egan, Merkle, and Weber (2014) use a panel survey to study individual
investors’ beliefs about return expectations of others. The results show that second-order
expectations are inaccurate and affected by several psychological biases, and that second-order
expectations influence investment decisions. Goldbaum and Zwinkels (2014) use a quantitative
survey to analyze how investors in a foreign exchange market forecast exchange rates. They find
evidence that panelists switch between a fundamental and a technical model, and that switching
behavior depends on the forecast horizon, investor-specific characteristics, and period-specific
characteristics. Markiewicz and Pick (2014) test whether adaptive learning models are capable of
replicating survey expectations of professional forecasters for a range of macroeconomic and
financial variables. Among other things, they find that adaptive learning models describe survey

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expectations better than typical time-series models do, and that the adaptive learning model with a
constant gain parameter performs especially well.

Sentiment is a central concept in behavioral finance, but it is notoriously difficult to define and
measure empirically. Kim and Kim (2014) use internet message postings to quantify investors’
sentiment regarding specific companies. They show that sentiment is affected by prior returns, but
find no evidence that it has predictive power for future returns, volatility, or volume. Siganos,
Vagenas-Nanos and Verwijmeren (2014) use Facebook’s Gross National Happiness Index (FGNHI) to
measure daily sentiment at the country level. They document a positive contemporaneous relation
between sentiment and returns, followed by mean reversion over the following weeks. Billett, Jiang
and Rego (2014) use survey data to investigate how stock prices depend on perceptions of brand
prestige and familiarity. Their results point out that stocks of companies with more prestigious
brands have higher valuation ratios and negative loadings on the Fama-French HML factor. Pantzalis
and Park (2014) study whether stock prices are affected by sentiment that is generated by sports
results. They find a positive contemporaneous relation between results from sports matches close to
firms’ headquarters and the stock returns of these firms, followed by reversion to the mean.

The final set of papers report on experimental asset markets. Lugovskyy et al. (2014) study the effect
of asset-holding caps on the formation of bubbles. They find that permanent caps reduce positive
bubbles but tend to create negative ones. With temporary caps, neither positive nor negative
bubbles emerge. Huber, Kirchler and Stefan (2014) look into the effect of a skewed distribution of
the fundamental value on market prices. Their results show that positive skewness initially causes
overpricing and negative skewness initially causes underpricing, and that these mispricings disappear
with learning. Füllbrunn, Rau and Weitzel (2014) examine the conditions for ambiguity effects in
markets. They conduct various asset market experiments, and find that ambiguity effects occur in
low-feedback call markets for assets that provoke high ambiguity aversion. The work of Fellner-
Röhling and Krügel (2014) concludes the special issue. They investigate the link between
overconfidence and trading activity. In line with earlier studies, they find no relation between
miscalibration measures and trading activity, but when they employ their novel measure of
misperception of signal reliability they do find a relation in one of the treatments.

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3. Questionnaire

The exciting collection of articles in this special issue demonstrates that the field of behavioral
finance is still progressing. The amount and variety of available data and methods are growing at a
rapid pace. In light of the abundant opportunities for new research, we have distributed a
questionnaire to sketch where the field should be heading according to the behavioral finance
research community.

In addition to this primary motivation for the questionnaire, we also had another purpose in mind.
We designed it such that it allowed us to find out whether behavioral finance researchers – experts
who are supposedly well-informed about the roles of heuristics and biases in judgment and decision
making – rely on the diversification heuristic when they express their views about the future of the
profession.1

Each questionnaire contained six questions. The first three questions were the same for all
respondents, and asked for their gender, age, and academic position. Next, three main questions
invited respondents to express their views on how the proportion of journal space in the theme of
empirical behavioral finance should be allocated.2 We distinguished between allocations across
different types of data (real vs. constructed data; henceforth, question 1), decision makers
(individuals vs. groups and organizations; question 2), and fundamental topics (preferences vs.
beliefs vs. limits to arbitrage; question 3). With each question, the weights assigned to the different
components of the “research portfolio” had to add up to 100 percent.

There were two versions of the questionnaire. Half of the potential respondents received the version
where each question listed two or three possible portfolio components. The other half received the
exact same questions, but in their version one of the portfolio components – the one we call the
grouped component – was further partitioned into finer components. Consequently, each question in
this alternative version contained a total of four to six possible components. In the former
(henceforth coarse) treatment, all answer categories were rather broad (e.g., individuals and groups
and organizations), whereas in the latter (henceforth fine) treatment the grouped component was
partitioned into subcomponents (e.g., individuals was partitioned into consumers, investors,

1
In the same spirit, Gächter et al. (2007) examined whether experimental economists are sensitive to gain-loss
framing. Their experiment used a conference acceptance email, in which the benefits of early registration were
framed as either collecting a discount or preventing a penalty. They find that junior faculty have a significantly
higher propensity of registering early in the penalty frame than in the discount frame, while no effect was
detected for senior faculty.
2
We did not seek to establish a guideline for journal editors, as they are, obviously, dependent on the number
and quality of papers submitted to their journals. The desired allocation of journal space is merely our measure
of the perceived relative importance of different categories of research.

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managers, and advisors). To prevent the possibility that respondents in the coarse treatment would
hold narrower definitions of the grouped components than respondents in the fine treatment, we
added the subcomponents between parentheses.3

After the review process of all submissions for the special issue was completed, we issued invitation
emails to take part in the questionnaire to 748 researchers with a known or findable email address
who had submitted or had been asked to review a paper for the special issue. The emails informed
the potential respondents about the progress we were making with the special issue, and provided a
link to the questionnaire. Each potential respondent was randomly allocated to one of the two
treatments. Apart from the link to one of the two questionnaire versions, both groups received the
exact same email. The questionnaire versions are presented in the appendix.

If respondents are not sensitive to framing, the weights given to the grouped components should be
the same in both treatments. For each question, the sum of the weights given to the subcomponents
in the fine treatment should be equal to the single weight given to the component encompassing
them in the coarse treatment. If, however, our respondents apply the diversification heuristic to
express their views about the future of their profession, then the weight given to the grouped
component in the coarse treatment (e.g., individuals) will be lower than the sum of the weights given
to the subcomponents in the fine treatment (consumers, investors, managers, and advisors).

Table 1 details the numbers of respondents in the two treatments, broken down by some basic
personal characteristics. A total of 239 researchers completed the questionnaire. Most respondents
are male (77%), between 30 and 50 years of age (74%), and tenured (64%). The two groups are
roughly comparable in terms of size and composition.

Table 2 shows the mean and median replies for each treatment. Overall, respondents assign roughly
the same weight to constructed and real data. In the coarse treatment, they express a slight
preference for real data (55%) over constructed data (44%), whereas in the fine treatment they give
a higher weight to the grouped subcategories of constructed data (57%). Across the subcategories,
there is a clear preference for experiments over surveys and questionnaires.

The responses to the second question indicate that research on individuals is considered more
important than research on groups and organizations. Especially in the fine treatment, the total
weight given to research on the financial decisions of individuals (86%) is substantially higher than

3
The lists of components that we used are subjective and probably not complete. The possibility of incomplete
partitioning of the grouped component, however, strengthens our results as it would work in the opposite
direction of the treatment effect that we observe in our data.

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Table 1: Numbers of respondents.
The table shows the number of respondents by treatment (coarse, fine, and combined) and by respondents’
characteristics (gender, age bracket, and academic position).

Coarse treatment Fine treatment Total

Female 30 24 54
Male 92 93 185

Age < 30 14 6 20
30 ≤ Age < 40 46 56 102
40 ≤ Age < 50 42 34 76
50 ≤ Age 20 21 41

Student 8 6 14
Non-tenured faculty 40 32 72
Tenured faculty 74 79 153

Total 122 117 239

the weight given to groups and organizations (14%). Within the grouped component of the fine
treatment, respondents assign the highest priority to investors, followed by managers, consumers,
and advisors, respectively.

When we question respondents about the relative importance of fundamental topics in behavioral
finance, they give most weight to research on preferences, followed by research on beliefs.
Investigation into the limits to arbitrage is deemed the least important. The strength of this finding,
however, differs substantially between the two treatments. In the coarse treatment, preferences and
beliefs are believed to be roughly equally important (weights of 40% and 37%, respectively). In the
fine treatment, the total weight assigned to the subcategories of preferences is approximately three
times as high as the weight assigned to beliefs (64% and 21%, respectively). The distribution of
weights over the preferences subcategories is strikingly uniform, with roughly 15% assigned to each
subcategory.

For the second purpose of our questionnaire  to see if respondents apply the diversification
heuristic  we focus on the differences between the feedback in the two treatments. The 1/n rule, if
strictly implemented by a respondent, would result in allocating identical relative journal spaces to all
listed components. In the coarse treatment, as many as 51 (42%), 36 (30%) and 13 (11%)
respondents have indeed allocated identical relative journal space to each of the components

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Table 2: Results.
The table shows the mean and median replies by treatment and by question. For each question, the treatment
means and the treatment medians for the grouped components are statistically compared in the last two
columns. Differences are calculated as the average reply in the fine treatment minus the average reply in the
coarse treatment. The p-values for the comparisons of means are from t-tests, the p-values for the
comparisons of medians are from Wilcoxon-Mann-Whitney tests.

mean diff. median diff.

Coarse treatment mean median Fine treatment mean median
(p-value) (p-value)
Question 1 (data)

(a) questionnaires 12.71 10

(b) surveys 16.36 15
(c) experiments 28.21 30
12.71 10
(a) constructed data 44.57 50 grouped 57.28 60
(0.00%) (0.00%)
(b) real data 55.43 50 (d) real data 42.72 40

Question 2 (decision makers)

(a) consumers 22.85 20

(b) investors 28.75 30
(c) managers 21.02 20
(d) advisors 13.79 10
25.71 30
(a) individuals 60.70 60 grouped 86.41 90
(0.00%) (0.00%)
(b) groups and organizations 39.30 40 (e) groups and organizations 13.59 10

Question 3 (fundamental topics)

(a) loss aversion 16.85 17

(b) reference points 16.44 15
(c) ambiguity aversion 15.59 15
(d) probability weighting 14.91 15
23.90 25
(a) preferences 39.89 40 grouped 63.79 65
(0.00%) (0.00%)
(b) beliefs 36.75 40 (e) beliefs 20.60 20
(c) limits to arbitrage 23.36 20 (f) limits to arbitrage 15.62 15

presented in question 1, 2 and 3, respectively. For the fine treatment, the corresponding figures are 9
(8%), 20 (17%) and 3 (3%).4

In line with a more general tendency to diversify across choice options, the mean and median
allocations for the three different grouped components are consistently higher in the fine treatment
than in the coarse treatment. The mean weights differ by 13 (question 1), 26 (question 2) and 24
percentage points (question 3). Each of these differences is significant at the one percent level.
Comparisons of the medians yield the same picture.

4
For each question, we counted the cases where a respondent’s allocations did not differ by more than one
percentage point from each other.

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Table 3: Results grouped components per respondent category.
For separate subsets of respondents, the table shows the mean and median replies for the grouped
components by treatment and by question. The different subsets group respondents on the basis of their
gender, age bracket, and academic position, respectively. Differences are calculated as the average reply in the
fine treatment minus the average reply in the coarse treatment. The p-values for the comparisons of means are
from t-tests, the p-values for the comparisons of medians are from Wilcoxon-Mann-Whitney tests.

Coarse treatment Fine treatment

mean diff. median diff.
mean median mean median
(p-value) (p-value)
Question 1 (data), constructed data component
Female 50.23 50 64.38 70 14.14 (0.15%) 20 (0.16%)
Male 42.73 50 55.45 60 12.72 (0.00%) 10 (0.00%)
Age < 30 44.64 40 60.83 65 16.19 (5.47%) 25 (7.62%)
30 ≤ Age < 40 41.96 50 56.46 60 14.51 (0.01%) 10 (0.01%)
40 ≤ Age < 50 48.29 50 58.09 60 9.80 (1.22%) 10 (0.43%)
50 ≤ Age 42.75 50 57.14 60 14.39 (1.53%) 10 (1.89%)
Student 38.75 40 50.00 50 11.25 (17.36%) 10 (19.67%)
Non-tenured faculty 43.25 50 55.78 60 12.53 (0.43%) 10 (0.13%)
Tenured faculty 45.92 50 58.44 60 12.52 (0.00%) 10 (0.00%)
Question 2 (decision makers), individuals component
Female 63.90 70 85.83 82.5 21.93 (0.00%) 12.5 (0.00%)
Male 59.65 60 86.56 90 26.91 (0.00%) 30 (0.00%)
Age < 30 64.00 63 80.83 80 16.83 (1.91%) 17 (1.50%)
30 ≤ Age < 40 55.48 50 87.55 90 32.08 (0.00%) 40 (0.00%)
40 ≤ Age < 50 62.90 68.5 86.91 90 24.01 (0.00%) 21.5 (0.00%)
50 ≤ Age 65.75 70 84.14 85 18.39 (0.00%) 15 (0.00%)
Student 55.00 50 86.67 85 31.67 (0.01%) 35 (0.55%)
Non-tenured faculty 59.33 60 86.97 90 27.64 (0.00%) 30 (0.00%)
Tenured faculty 62.05 66 86.16 90 24.11 (0.00%) 24 (0.00%)
Question 3 (fundamental topics), preferences component
Female 40.33 40 64.33 67 24.00 (0.00%) 27 (0.00%)
Male 39.74 40 63.65 65 23.91 (0.00%) 25 (0.00%)
Age < 30 40.64 40 64.17 67.5 23.52 (0.29%) 27.5 (0.57%)
30 ≤ Age < 40 38.24 40 64.34 67.5 26.10 (0.00%) 27.5 (0.00%)
40 ≤ Age < 50 41.40 40 64.56 65 23.15 (0.00%) 25 (0.00%)
50 ≤ Age 39.95 40 60.95 65 21.00 (0.00%) 25 (0.00%)
Student 33.75 40 59.83 69.5 26.08 (0.46%) 29.5 (2.39%)
Non-tenured faculty 39.65 40 62.16 65 22.51 (0.00%) 25 (0.00%)
Tenured faculty 40.68 40 64.75 65 24.07 (0.00%) 25 (0.00%)

Table 3 shows the comparisons for subsets of the data, partitioning by gender, age, and academic
position. Evidently, naïve diversification is a widespread behavioral phenomenon. Virtually all
comparisons yield statistically significant differences; the insignificant results pertain to the
comparisons of small groups of respondents (Age < 30 and Position = Student). Multivariate
regression analyses for the three different questions with the grouped components’ weights as the

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dependent variables and a treatment dummy variable and respondent characteristics as regressors
corroborate the results (not tabulated), regardless of the precise model specifications.

Interestingly, these findings suggest that the evidence for naïve reliance on the diversification rule
previously documented in the literature is not limited to lay people and laboratory subjects. Even
among experts in our field, when asked their opinion on where the profession should be heading,
there is a tendency to diversify. Learning may not be as fast as critics of behavioral finance
sometimes assume.

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 Appendix: the questionnaire

Marking added here (not provided to respondents):

[…] = coarse treatment only
{…} = fine treatment only
* = grouped component

Gender: Male Female

Age: Age<30 30<=Age<40 40<=Age<50 50<=Age
Position: Student Non-tenured faculty Tenured faculty

1. Please indicate the proportion of journal space in the theme of empirical behavioral finance you
think should be allocated to research employing each of the following data types (weights should
sum up to 100%):

[(a) constructed data (questionnaires, surveys, experiments)*

(b) real data (e.g., market data, financial reporting data)]

{(a) questionnaires*
(b) surveys*
(c) experiments*
(d) real data (e.g., market data, financial reporting data)}

2. Please indicate the proportion of journal space in the theme of empirical behavioral finance you
think should be allocated to research on the financial decisions of (weights should sum up to 100%):

[(a) individuals (consumers, investors, managers, advisors)*

(b) groups and organizations]

{(a) consumers*
(b) investors*
(c) managers*
(d) advisors*
(e) groups and organizations}

3. Please indicate the proportion of journal space in the theme of empirical behavioral finance you
think should be allocated to each of the following fundamental topics (weights should sum up to
100%):

[(a) preferences (e.g., loss aversion, reference points, ambiguity aversion, probability weighting)*
(b) beliefs
(c) limits to arbitrage]

{(a) loss aversion*

(b) reference points*
(c) ambiguity aversion*
(d) probability weighting*
(e) beliefs
(f) limits to arbitrage}

[14]

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